Proper Perfection Procedures for Intellectual Property

Journal Issue

May 2002

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Over the past few years, issues regarding the perfection of security interests in
intellectual property have become a popular topic of conversation. This has been
especially true due to the current state of the technology sector of the economy, but
also because the methods by which a creditor perfects its security interest in
intellectual property is confusing.

The first issue to be addressed in determining how security interests in intellectual
property are perfected is to know what type of intellectual property is at issue.
Perfection requirements for trademarks and patents are the same, while perfection of
interests in copyrights differs. The reason for the difference is that patents and
trademarks are arguably governed by the UCC, while copyrights are not, due to
preemption issues.

<h3>Copyrights</h3>

A principal case addressing this issue is <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Peregrine Entertainment Ltd.,
116 B.R. 194 (C.D. Cal. 1990)</a>. In this case, the court addressed
whether a security interest in a copyright is perfected by an appropriate filing with
the U.S. Copyright Office or by a <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; financing statement filed with the
relevant secretary of state.

The debtor's principal assets in Peregrine were a library of copyrights, distribution
rights and licenses to films and accounts receivable arising from the licensing of the
films to various programmers. The secured creditor in the case had a security agreement
and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; financing statement describing the collateral as "all inventory consisting
of films and all accounts, contract rights, chattel paper, general intangibles,
instruments, equipment and documents related to such inventory, now owned or hereafter
acquired by the debtor." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 198</a>.

Section 9-106 of the Uniform Commercial Code defines "general intangibles," and
the Official Comments to §9-106 specifically identify "copyrights trademarks and
patents" as included in the definition of general intangibles. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… §9-106</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

In Peregrine, the debtor challenged the creditor's security interest in the
copyrights to the films and in the accounts receivable generated by their distribution
as being unperfected because the secured creditor failed to record its security interest
with the U.S. Copyright Office and only filed its <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; Financing Statement with
the relevant secretaries of state.

According to relevant provisions, the Copyright Act provides that "any transfer
of copyright ownership or other document pertaining to a copyright" may be recorded in
the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Copyright Office. 17 U.S.C. §205(a)</a>. A "transfer" under the act
includes any "mortgage" or "hypothecation of a copyright," whether "in whole or in
part" and "by any means of conveyance or by operation of law." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§§101, 201</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 116 B.R. at 198-199</a>. Thus, it is clear
that the security interest in a copyright could be recorded in the U.S. Copyright
Office; however, what must be determined is whether the UCC provides a parallel
method for perfecting such an interest. This is a matter of preemption of state law
by federal statute. The comprehensive scope of the federal Copyright Act's recording
provisions, along with the unique federal interests they implicate, support the view
that federal law preempts state methods of perfecting security interests in copyrights
and related accounts receivable. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 199</a>.

The federal Copyright Act ensures predictability by virtue of its recording system.
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; "No useful purposes would be served—indeed, much confusion would result—if
creditors were permitted to perfect security interests by filing with either the
Copyright Office or state offices." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; If state methods of perfection were valid,
a third party would have to check the indices of the U.S. Copyright Office and any
relevant secretary of state.

Due to these issues and the fact that the Copyright Act provides its own scheme
for determining perfection and priority, recording in the U.S. Copyright Office rather
than filing a financing statement under Article 9 is the proper method for perfecting
a security interest in a copyright. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 203</a>.

Additional authority adopts this conclusion, although the law has been somewhat
unclear with regard to perfection of patents, trademarks and copyrights. Under the new
provisions of Article 9, there may be a limitation on Peregrine; federal copyright
law may not preempt Article 9 with regard to unregistered copyrights. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… UCC
§9-106(c)(1)</a>; see <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… and Perfection of Security Interests Under
Revised Article 9," 9 Am. Bankr. Inst. L. Rev. 179 (Spring 2001)</a>.

<h3>Patents and Trademarks</h3>

Perfection of security interests in patents and trademarks are different, and the
Peregrine decision is often distinguished to show that preemption of state law does not
occur in all situations where federal law exists. With regard to patents and
trademarks, courts have generally held that federal law preempts Article 9's filing
system only where federal law includes a provision of mandating filing in a federal
office; an example would be transfers of a patent. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Cybernetic Systems,
239 B.R. 917, 920 (B.A.P. 9th Cir. 1999)</a>. Recordation of
assignments of less than full ownership, including security interests in a patent, was
discretionary under the Patent Act, and thus not preempted. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; A similar result
has been reached in trademark cases. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Together Develop. Corp., 227
B.R. 439 (Bankr. D. Mass. 1988)</a>.

The federal statutes governing patents and trademarks do not set forth the procedure
for perfection and priority schemes in the same detail as the Copyright Act.
Accordingly, courts have reached the conclusions mentioned above and determined that
state law and the UCC are not preempted.

In the past, the relationship between Article 9 and federal patent and copyright
laws has been confusing and often uncertain. Under Revised Article 9, copyrights,
trademarks and patents will continue to be considered general intangibles. Section
9-109(a) of Revised Article 9 defers to federal law only if it "preempts this
article." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… §9-109(c)</a>. Official Comment 8 to UCC-§109 does appear to
refer to the Peregrine decision stating that Article 9 sometimes deferred to federal
law even when federal law did not necessarily preempt Article 9. Section
9-109(c)(01) of Revised Article 9 recognizes a deference to federal law only
when and to the extent that it must—"i.e., when federal law preempts it." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
§9-109</a>, Comment 8; see <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… and Perfection of Security Interests Under
Revised Article 9," 9 Am. Bankr. Inst. L. Rev. 179 (Spring 2001)</a>.
It is not clear yet what effect this change will have.

Journal Authors

Carrie Beth Lesser

Jeffrey W. Warren

Journal Date

Wednesday, May 1, 2002 - 12:00

Bankruptcy Rule

2002